Wells Fargo Overtakes JPMorgan as Financing Expands: Commodities

July 18 (Bloomberg) -- Wells Fargo & Co. overtook JPMorgan Chase & Co. as the biggest lender to commodities companies in the second quarter, as total financing rose to the highest level since 2011 after a record loan to Glencore Xstrata Plc.

Wells Fargo’s biggest deals were a $2.5 billion revolver facility to Oasis Petroleum North America LLC and a $4 billion revolving credit for Linn Energy LLC, data compiled by Bloomberg show. The San Francisco-based bank bought $9.5 billion of BNP Paribas SA’s energy loans in 2012. The total provided to the industry rose 13 percent to $188.6 billion from a year earlier as Glencore Xstrata raised $17.3 billion.

The money provided would have risen 2.3 percent without that deal, lagging behind the 8.8 percent gain across all industries as record-low interest rates spurred companies to refinance debt. Commodities tumbled to a nine-month low in April as Chinese growth slowed and supply surpluses emerged.

"It’s a refinancing market," said Craig Gardner, a managing director at RBC Capital Markets in Toronto. "The mining borrowers that went to market timed it perfectly, partially by luck, given what happened to commodity prices. There was an increased nervousness in the market amongst the borrowers and they just wanted to put it to bed."

Worst Performance

Gold, copper, iron ore, corn and tin were among commodities that tumbled into bear markets last quarter. The 115-member Bloomberg World Mining Index of equities slumped 30 percent this year, the worst performance since the gauge began in 2003. The MSCI All-Country World Index advanced 10 percent and a Bank of America Corp. index shows Treasuries lost 2.4 percent.

It was the first time in three quarters that JPMorgan, the biggest U.S. bank by assets, didn’t top the table. It came third behind RBC Capital Markets, part of Royal Bank of Canada, the country’s largest lender by assets.

Wells Fargo, the largest U.S. mortgage lender, made $17.5 billion of loans to commodities companies in the second quarter, from $5.5 billion in the previous three months, when it ranked seventh, the data show. It was co-lead arranger with RBC Capital Markets on the loan to Linn Energy, which agreed to buy Berry Petroleum Co. for $2.42 billion in February. It didn’t participate in the Glencore Xstrata financing.

Natural Resources

RBC Capital Markets, based in Toronto, made $14.4 billion of loans in the second quarter, lifting its ranking from sixth in the first three months. The biggest deal was a C$3 billion ($2.88 billion) revolver facility for Calgary-based Canadian Natural Resources Ltd., the nation’s third-largest oil and natural gas producer by market value.

JPMorgan, based in New York, oversaw $13.1 billion of lending in the second quarter. Together with BMO Capital Markets it arranged a $2 billion revolver facility for Teck Resources Ltd., Canada’s largest diversified mining company. JPMorgan also oversaw a $1 billion loan for PDC Energy Inc., a Denver, Colorado-based oil and gas company.

Officials for Wells Fargo and JPMorgan declined to comment.

Bank of America Corp., based in Charlotte, North Carolina, ranked fourth in the second quarter after arranging $11.58 billion of loans and Toronto-based BMO Capital Markets was fifth with $10.1 billion.

Credit Lines

The figures compiled July 15 reflect transactions involving more than one bank and include credit lines, project or term loans and trade finance.

Commodities companies announced 899 mergers and acquisitions valued at $92.8 billion in the second quarter, the lowest level in almost four years, as share valuations slumped, the data show. The combined market capitalization of the Bloomberg World Mining Index dropped by $424 billion to $914 billion since the start of January, after as much as tripling in the previous four years.

"M&A has been average at best," said Peter Hall, global head of investment-grade loan syndicates at Bank of America in New York. "It’s surprisingly disappointing because financing rates remain so attractive that you would think that companies would be more willing to do a stretch deal as they can afford to take a little bit more debt because rates are so low."

The average interest banks charged for loans to commodity companies was 319 basis points more than benchmark lending rates in the second quarter, from 330 basis points a year earlier, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

Trade Finance

British banks including Royal Bank of Scotland Plc, HSBC Holdings Plc and Barclays Plc, Zurich-based Credit Suisse Group and Commerzbank AG in Frankfurt all boosted their commodity lending from a year earlier. UBS AG, Switzerland’s biggest lender, hired 10 people for commodity trade finance in Geneva, according to Jenna Ward, a spokeswoman in London.

European banks are lending more after a drop in their costs for borrowing dollars, the currency most often used in loans to commodities companies. A year ago they were borrowing for three to five years at an average of 200 to 300 basis points over Euribor, the rate at which banks say they see each other lending in euros. Rates now average 175 to 225 basis points, according to Christopher Wheeler, an analyst at Mediobanca SpA in London.

"Last year there was a lot of stress on the dollar funding side," said Ashu Khullar, the co-head of loan structuring and syndication for Europe, Middle East and Africa at Citigroup Inc. in London. "Things have improved in the bank market over the last year, hence the tightening in pricing across the board. The borrowing costs have probably bottomed out at this level."

Benchmark Rates

Glencore Xstrata’s $17.3 billion of revolving credit facilities, backed by 80 banks, was the largest ever loan for a commodity trader. Royal Bank of Scotland Group was hired to coordinate the loan, with Banco Santander SA, Barclays, Commerzbank and Societe Generale SA also helping to arrange the debt. JPMorgan and RBC Capital Markets were among arrangers and bookrunners.

Glencore Xstrata, based in Baar, Switzerland, is paying a margin of 90 basis points more than benchmark rates on the three-year portion of the debt. That compares with 137.5 basis points paid by Geneva-based Vitol Group, a closely held commodity trader, on its $5.1 billion revolving loan facility raised in 2011, the data show.

Bank Financing

North American commodities companies borrowed 40 percent more in the second quarter than a year earlier, while loans fell 19 percent in Asia and 24 percent in the Europe, Middle East and Africa region, the data show.

Smaller commodities trading companies are still struggling to get bank financing, said Jacques Begle, the former co-head of trade finance at BNP Paribas. He is setting up two trade-finance funds in Geneva.

"The easiest way of financing for a small trader is going to a larger company," Begle said. "The risk is that a bigger trader can gobble up the smaller trader’s deal once they’ve done it a few times."

While prices for 47 of 64 commodities tracked by Bloomberg retreated this year, raw-materials producers are still making money. BHP Billiton Ltd., the biggest mining company, will report a 21 percent drop in profit to $12.2 billion for its fiscal year that ended June 30, rebounding to $15.01 billion this year, according to analyst estimates compiled by Bloomberg.

"Banks that play in the commodity sector are used to the cycles," said Philip Lunn, the head of the loans product group for Canada at BMO Capital Markets in Toronto. "For corporate finance and treasury departments, you’ve got a receptive market. You’ve got some uncertainty on where prices are going to be and their forecast flows. It’s prudent to shore up your liquidity."